Last week, stock prices tumbled in panic selling after US President Barack Obama unveiled a proposal to limit commercial banks' trading activities for their own accounts. This legislation will have to go through Congress. The move reflects the administration's growing concern about its sagging popularity. The Democrats' loss of Edward Kennedy's Senate seat has sent an alarming signal that voters' anger is rising high. The Democrats have lost an absolute majority in the Senate. If there is no action to soothe voters' sentiment, chances are that they will lose even more in the mid-term election this year. But will the legislation to curb banks' proprietary trading and risky investments in hedge funds and private equity firms be able to restore prudence to the US financial system?

The answer is: Not really. Global financial capitalism has developed to the extent that financial institutions have become too big to fail. Yet, by their predatory and bubble-like nature, they will eventually fail. Banks' assets have become, in most developed countries, larger than the gross domestic product, from more than 200 per cent for the US to more than 1,200 per cent for Iceland. In good times, the banks make money. In bad times, governments have to bail them out. In the case of Iceland, the internationalisation of the banking system resulted in the expansion of the banks' balance sheets by more than 1,200 per cent of GDP. So when the banks fail, there is no way the government can bail them out. There is an enormous risk that most countries will face economic dislocation when their banks collapse. They have given the banks a licence to take uncalculated risk, and have become the banks' hostages.

Credit expansion creates wealth and economic growth. But at the end of the cycle, it creates a bust. The scale has become larger in each cycle. With the collapse of the global financial systems in 2009, we believe the current model is seeing its death warrant. If banks were to engage in normal lending, by making profits on the margin between deposit rates and lending rates, they would not be in this problem. But this must be accompanied by a strong capital base. The problem is that the banks are allowed to become investors rather than lenders. They invest in equities, in bonds, and do all kinds of trading on their own accounts through stakes in hedge funds or financial subsidiaries. They rely on a tiny deposit base - money from the public, which they are supposed to protect - to embark on investment sprees and risky ventures. Banks no longer engage in traditional banking alone; they are the economy.

Goldman Sachs generated at least 76 per cent of 2009 revenue from trading and principal investments. Only about 10 per cent of the New York firm's revenue comes from proprietary business that has nothing to do with clients. New York-based JPMorgan derived $9.8 billion of revenue from principal investments in 2009, or 9.8 per cent of the firm-wide total. The prior year, the bank lost $10.7 billion on principal investments. Both Goldman Sachs and JP Morgan are beneficiaries of federal bailouts.

We look upon loan sharks with contempt. They normally charge 50-60 per cent a year in interest. But they bet on their own capital entirely. If the customers go broke, the loan sharks also lose money from their own pockets. The banks, however, have a tiny capital base or nil to start with. They rely on public deposits to make loans. They go further to lobby for financial services liberalisation so they can engage in all kinds of activities associated with the financial markets. Their risk-taking and greed for profit creates risk to the economy as a whole.

Simon Johnson, former chief economist of the IMF, is right to argue that if banks are too big to fail, they are too big to exist. Ironically, since the crisis, some big US banks have seen their assets and profits increase thanks to bailouts. Johnson said the US government has been taken over by the oligarchs of Wall Street. There is no further truth than that. For the economic system to enjoy stability, banks must be dismantled; their scope of financial services curbed. Regulation for banks and non-banks must become stricter. Banks must fail naturally like other bankrupt companies, without holding the entire economy hostage. If we can't devise a new banking system and get rid of the too-big-to-fail feature, we'll continue to face this endless cycle of bailouts.

The Thai banking system is following the global financial capitalism model. In the 1997 financial crisis, authorities shelled out Bt2.4 trillion, both principal and interest, to bail out the financial system. This debt is being paid off by taxpayers. It is time Thai authorities took a hard look at the banking system so that appropriate measures are introduced to prevent risky ventures and investment. No bank should be too big to fail.